FINRA recently disclosed that Sanctuary Securities, Inc. (formerly known as David A. Noyes & Company) agreed to submit a Letter of Acceptance, Waiver and Consent (AWC) relating to its failure to supervise its solicited sales of inverse and leveraged exchange traded funds (Non-Traditional ETFs or NT-ETFs) in that the firm’s supervisory system was not sufficiently tailored to address the unique features and risks of these products.
What is a Non-Traditional ETF?
Non-traditional ETFs are designed to return a multiple of an underlying index or benchmark, the inverse of that benchmark, or both, over only the course of one trading session— usually a single day. Non-traditional ETFs typically rebalance their portfolios on a daily basis. Due to the effects of compounding of daily returns during the holding period, the performance of non-traditional ETFs over periods longer than a single trading session “can differ significantly from the performance … of their underlying index or benchmark during the same period of time.”
Because of these risks and the complexity of the products, FINRA has advised broker-dealers that NT-ETFs “are typically not suitable for retail investors who plan to hold them for more than one trading session, particularly in volatile markets.”
FINRA’s Regulatory Notice on Non-Traditional ETFs
FINRA Regulatory Notice 09-31 cautioned firms about the need to establish a reasonable supervisory system “to ensure that their associated persons comply with all applicable FINRA and SEC rules when recommending any product, including leveraged and inverse ETFs,” and implement written supervisory procedures that, among other things, require associated persons to perform appropriate suitability reviews. The Notice provided specific guidance regarding the risks and suitability concerns associated with NT-ETFs, and the need for a supervisory system to address those issues. The Notice also reminded firms that they must train registered persons, including supervisors, about the terms, features, and risks of all NT-ETF.
The suitability obligations under FINRA Rule 2111 require firms and their representatives to perform reasonable diligence to understand the nature of a recommended security, as well as the potential risks and rewards. Brokerage firms and its financial advisors must only recommend suitable investments to their customers. Unsuitable investment advice is an investment recommendation that is not consistent with an investor’s investment objectives, risk tolerance and investment time horizon. Each customer should have its own specific determination of suitability based on its particular circumstances.
With respect to NT-ETFs, the FINRA AWC stated that firms must understand the terms and features of the funds, including how they are designed to perform and how holding periods impact a fund’s performance.
Sanctuary Securities, Inc. (Formerly Known as David A. Noyes & Company) and its Non-Traditional ETF Business
According to the FINRA, from January 1, 2014 to December 31, 2018, approximately 30 firm registered representatives recommended to retail customers the purchase of approximately $5 million worth of NT-ETFs which generated approximately $60,000 in commissions.
Sanctuary Securities, Inc. (formerly known as David A. Noyes & Company) executed at least 600 NT-ETF purchases in approximately 150 retail customer accounts. Many of the customers to whom the firm recommended these products had primary investment objectives that included income, growth and income, and growth, and conservative or moderate risk tolerances. Many customers also held their NT-ETF positions for extended periods of time, often months and sometime years, and suffered net losses in those positions.
In October 2018, the firm issued a directive to its registered representatives prohibiting them from purchasing any NT-ETFs on behalf of their customers going forward.
Sanctuary Securities, Inc. (Formerly Known as David A. Noyes & Company) and its Failure to Supervise Non-Traditional ETFs
From January 1, 2014 to December 31, 2018, Sanctuary Securities, Inc. (formerly known as David A. Noyes & Company) failed to have in place a reasonable supervisory system to monitor the recommendation of Non-Traditional ETFs. The firm did not have a reasonable supervisory system for reviewing representatives’ recommendations to purchase NT-ETFs based on a customer’s age, investment objective, risk tolerance or financial profile, including net worth.
Though the firm required representatives to complete product-specific training prior to recommending NT-ETF transactions, no such training was ever provided to representatives or to the supervisors reviewing their conduct. Moreover, the firm failed to educate its representatives and supervisors regarding how to determine whether a NT-ETF was suitable for customers given the unique features and risks of those products.
Investment Losses with Sanctuary Securities, Inc. (Formerly Known as David A. Noyes & Company) and Non-Traditional ETFs– Contact Us
Former and current customers of Sanctuary Securities, Inc. (formerly known as David A. Noyes & Company) who were sold non-traditional ETFs and suffered investment losses that exceed $250,000, and those who may have information relating to the manner in which the firm handled their accounts and non-traditional ETFs, are encouraged to contact Lawrence L. Klayman, Esq., at (561) 542-5131, and download our Special Investor Report.
KlaymanToskes is a leading national securities law firm which practices exclusively in the field of securities arbitration and litigation, on behalf of retail and institutional investors throughout the world in large and complex securities matters. The firm represents high net‐worth, ultra‐high‐net‐worth, and institutional investors, such as non‐profit organizations, unions, public and multi‐employer pension funds. KlaymanToskes has office locations in California, Florida, New York and Puerto Rico.
Lawrence L. Klayman, Esq., (561) 542-5131